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Receiving an inheritance can be a significant and life-changing event, providing you with an opportunity to secure your financial future. However, it’s crucial to approach this windfall wisely to make the most of it.

We will discuss smart financial moves to make when you receive an inheritance. We also want to give you a free resource to assess your current financial situation so you can make sound financial decisions.

Millennials and Gen Z

If you were born between 1981 to the early 2000’s, you fall in this camp. You are more likely to have fewer assets and higher human capital (the ability to work and earn income), families with younger kids, and debt.

You received an inheritance. Now what? Consider these actions steps:

Put it away in savings. Boring, yes, but a healthy savings account can liberate your finances. In my experience, people with underfunded short-term reserves have a hard time with big-picture financial moves like Roth conversions and buying proper insurance.

Pay down student loans. Knowing how much of your inheritance you should devote to paying down debt is tricky. Debt is amoral, but too much debt can hinder your ability to respond to emergency expenses, invest regularly, and be generous.

Student loans come in different forms (i.e. Federal and private) and have a confusing number of repayment plans (i.e. standard and income-driven). Having a student loan plan in place is a good first step to determining how much of your inheritance should go towards paying this down.

Invest in your future. If you receive a large inheritance, you might be surprised to learn that you can’t dump a huge chunk of it into a retirement account. These types of tax-advantaged accounts have annual contribution limits. But you can still invest for the future in much the same way. A taxable investment account allows you to put your money to work so you can increase it over time. The best part is you have longer for this money to grow and compound!

Buy a house. Buying a house can seem daunting, and saving up for the down payment can be slow. What better way to use an inheritance than buying a home?

Gen X

If you were born between 1965 and 1980 at this point you have higher assets, your debt burden is smaller, and your goals are more nuanced. You also have less room for error, so use this inheritance wisely!

If you’ve received an inheritance, consider these steps:

Boost retirement savings. Hopefully you’ve been making use of tax-advantaged retirement accounts. An inheritance at this stage of life allows you to boost any shortfall in your retirement plan. Again, look at opening a taxable investment account to accommodate a large deposit.

Prepare for the cost of education. Have you seen the cost of college lately? Now think of your kids—how much will it cost when they are in school?

I get it—college is expensive and you might not be able to save for the entire bill. That’s fine! Your first step is to talk with your spouse about what percentage of college costs you’d like to pay for. Let’s say you decide on a goal to pay for 50% of your kids’ college. Then, you can use a college savings calculator to estimate the future cost of education (with inflation).

Baby Boomers

Finish off your mortgage. You’re right—we don’t usually advocate paying off your mortgage early. However, if your mortgage will not be paid off by retirement, it might be a good idea to use some of your inheritance to fast-track this expense.

Formulate your long-term care plan. The best time to think about your future long-term care expenses is in your 50’s. Why? You are healthier in your 50’s then you will be in your 60’s. This makes it easier to qualify for long-term care insurance. Secondly, starting earlier means you have more time to leverage your assets for future long-term care expenses.

How can an inheritance be used for future long-term care expenses? A modern approach to long-term care insurance involves funding a “hybrid” life insurance policy. These can be financed through a one-time premium, a series of ongoing premiums, or both.

Fund your legacy goal. You were the beneficiary of someone else’s legacy. Do you also have a goal to pass on an inheritance? The goal to fund a legacy is really a retirement income goal in disguise. You have a nest egg that grew. How efficiently you design your retirement income plan determines how much you will pass along to your beneficiaries.

If you are trying to decide what to do with an inheritance, we have a free financial assessment to help you. Elements is a financial scorecard that will allow you to quickly see your financial picture at a glance.

To get your free financial assessment, click this link to download the Elements app and begin answering the questions. When completed, one of our financial advisors will send you a brief video to help interpret your scores. The process of downloading and completing Elements should take 15 minutes. Our goal is that you will receive more financial clarity as a result of this free assessment!

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